Netflix stock jumped more than 23% Tuesday morning following Monday’s earnings and several announcements by the streaming video powerhouse.
It said that the number of its subscribers rose by 2.03 million to 29.17 million, topping HBO. It also said it planned to focus on original content, and would let its current program licensing deal with Viacom expire at the end of May.
Not coincidentally, Viacom’s stock was down more than 1% on a day when the overall market was up more than 100 points.
Not so long ago, Netflix was seen as a scourge of the traditional TV business, a business that could ruin the industry as we know it. Then it began writing big checks to Viacom and other content companies that propped up earnings and helped media moguls pocket huge paychecks. Now, Netflix may again be a danger.
Analyst Michael Nathanson of Nomura Securities noted that Netflix’s latest evolution creates two problems.
The first is that as the big non-exclusive content deals Netflix signed start expiring, media companies will lose their high-margin license fees.
“We estimate that Viacom may have booked about $130 million or so per year from Netflix for domestic content which, if entirely not replaced, at a 65% margin is an impact of about $55 million after-tax or about 3% of net income. Netflix did state that they hope to acquire certain programs from Viacom and Viacom will seek to sell these shows to other SVOD players so that $55 million at risk is worse case,” Nathanson said in a research note.
Other media companies also stand to lose, over time, from the change in Netflix strategy, Nathanson said. Bulk non-exclusive output deals have been signed by CBS, News Corp., NBC Universal and Discovery.
At the same time, as Netflix improves it service and adds original programming, “they will continue to challenge the traditional consumption patterns of linear TV,” Nathanson says.
Nathanson notes that broadcast networks ratings (L7) are declining at a double-digit rate.
“There is no such thing as a free lunch, Nathanson said. “The availability of improving content online will impact the linear viewing of consumers and the ability of consumers/programmers to create new hits out of linear audience flow.”
The trend increases the value of live programming, such as sports, which leads Nathanson to favor Disney (ESPN) and News Corp.